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COMMENTARY
August 3, 2011
Through the ceiling
Perhaps I was wrong, Saturday, to guess from developments at that point, that U.S. congressmen could not paper over their differences in time to save the U.S. Treasury from colliding with the "debt ceiling." If we consider it as a piece of pure political craftsmanship, it was a superb show, in which the Republican House majority leader, John Boehner, proved quite the artist. He took his disconsolate Tea Party passengers along for a wonderful ride; identified himself with all their preferred destinations; then finally shoved a Senate bipartisan compromise through the House with Democrat votes. And with hours to spare, before the train ran over the innocent young maiden!It was the Italian solution. A fortnight ago, Italy's deputies had faced the same problem: impending default. In the Euro-zone context, they were too big to bail out. And anyway, European lenders had their hands full bailing out Greece. All the Italians had to do, to make the bankers look another way, was give the appearance of dramatic action. And if Italians cannot produce theatre, who can? In four days, they drafted and passed a remarkable piece of legislation in which all kinds of budget cuts were announced - beginning several years down the road. And taxes were stealthily raised, with effect immediately. With everyone's attention now shifted to America, they have returned to bingeing. America is exceptional: an economy so large, no one gets distracted. For a week, the whole world got to watch their fiscal melodrama. In the long term, their case is very ugly; in the short term, we laugh. This is because the Americans have, for the immediate future, a unique getout-of-jail-free card. They are not merely "too big to bail." Any creditor who tries to foreclose will go down with them. It is the old saw: that if I owe the bank $7,382.05, I have a problem. But if I owe the bank $15 trillion and counting, the bank has a problem. They really can't want me to default. Even Standard & Poor's would rather threaten a ruinous "downgrade" on U.S. debt, than actually reduce their Triple-A rating to AA-plus: for the consequences, even to them, would be too horrible. A considerable amount of nonsense has been written, and even published, about the malice of those inscrutable Chinese, Russians, and other furriners, who would dearly love to dirt the once-almighty Dollar. They have malice enough, but consider: they cannot do so without radically raising the exchange rates of their own nasty paper currencies, while wiping their own still-formidable U.S. reserves. It gets better. Once their own currencies start shooting up, from a dollar sell-off, their central banks will have to buy back U.S. dollars by the cosmic wainload, to hose down their own fevered selves. And in the course of this exercise, they find themselves again breathing the thin air of U.S. Treasury notes. From the U.S. point of view, this is a "make my day" proposition. China's in a particularly favourable position, to take the long step off the short plank: for a soaring Renminbi would moosh their exports. My own instinct, since everyone agreed that a U.S. default would be a very bad thing, was to expect much good might come of it. The "good" in this case being strictly relative: that it is better to have a smaller catastrophe now, than a bigger catastrophe later. And anything that makes it harder for a government to borrow, is worth entertaining. For while I may take a connoisseur's passing pleasure in Italian theatrical productions, I retain a Scotch-Canadian preference for hard solvency, after the show. Or to put this another way, I think the "debt ceiling" deal was a bad joke. Cuts are almost entirely deferred until 2014 and later, and are anyway on a very modest scale. Even the details are deferred. Meanwhile, the biggest national debt hike in planetary history has been agreed. And in the fine print, to my view, the Democrat politicians took the Republicans to the cleaners. There are administrative possibilities for raising taxes and quasi-taxes, on the sly. There is a triggering mechanism to trash the military budget, if the Democrats don't like alternative cuts the Republicans may propose before Christmas. There is a parallel trigger to trash Medicare, but this can be easily uncocked by the simple administrative expedient of transferring "Medicare" customers to "Medicaid." And then, there is that compulsory vote on a balanced-budget constitutional amendment - which the Democrats will easily defeat. But who won and who lost, politically, is only a perception; substance also counts. "A move in the right direction," they say; a spit in the right ocean; or in Chinese, "A journey of a thousand miles begins with a single step." Just 4,999,999 paces to go, by this reckoning. Except, the very first step was backwards. David Warren
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